As per Memorandum on Finance Bill, 2010 a source rule was inser-ted in section 9 of Income-tax Act in 1976 with an intention of bringing to tax fees for Tec-hnical Services by creating a deeming fiction that even in cases where services are provided by a non-resident outs-ide India, consideration for such services will be taxable in India so long as services are utilised in India. The source rule effectively means that the situs of the rendering of ser-vices is not relevant. It is the situs of the payer and the situs of the utilisation of ser-vices which will determine the taxability of such services in India.
As against the above view, the honourable Supreme Court, in case of Ishikawajima-Harima Heavy Industries Ltd v/s DIT (2007) (288 ITR 408) , clarified that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilised in India.
The Apex Court, inviting attention to international covenants and conventions, held that sufficient territorial nexus between rendition of services and territory of India is necessary to make the income taxable in India. In an earlier case of Electronic Corporation also the Honourable Supreme Court had absorbed “it is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India”.
The Interpretation given by Apex Court did not find favour with the Government. Therefore, to overcome the problem regarding the source rule, an explanation was inserted in section 9 with retrospective effect from 1st June, 1976 vide Finance Act, 2007. The explanation sought to clarify that where income is deemed to accrue or arise in India, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India.
However, in the recent case of Jindal Thermal Power Company Ltd., the Karnataka High court on 16th March, 2009 held that the amendment made in sec.9 by Finance Act, 2007 does not do away with requirement of rendering of services in India. The Honourable Court held that “the plain reading of the said provision suggests that criterion of residence, place of business or business connection of a non-resident in India has been done away with for fastening the tax liability. However, the criteria of rendering service in India and the utilisation of the service in India laid down by the Supreme Court in Ishikawajima’s case to attract tax liability u/s 9(1)(vii) remains untouched and unaffected by the explanation to section 9(2)”.
The Finance Bill, 2010 again seeks to amend section 9 to reinstate the departmental view. The Memorandum to the Finance Bill 2010 states as under:-“In order to remove any doubt about the legislative intent of the aforesaid source rule it is proposed to substitute the existing explanation with a new explanation to specifically state that the income of non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub section (1) of section 9 and shall be included in his total income, whether or not, a) The non-resident has a residence or a place of business or business connection in India; or b) The non-resident has rendered services in India.
This amendment is proposed to take effect retrospectively from 1st June, 1976 and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years.
It is really unfortunate that the Government does not hesitate in unsettling the legal position settled by the highest Court of the nation. Such kind of persistence goes against fundamental doctrine of judicial independence of a democratic country like India.
(Author is a Sr. Partner in S S Kothari Mehta & Co.) E-mail: hp.agrawal@sskmin.com
